Pro-Crypto Congressmen Look To Challenge Longstanding Securities Definition

December 22, 2018 12:48 AM

Warren Davidson (R-OH) and Darren Soto (D-FL) have introduced a new bipartisan bill pitched as an “ICO fix” for businesses and consumers.

The Token Taxonomy Act seeks to amend two laws: the Securities Act of 1933 and the Securities Exchange Act of 1934. The former law requires the registration of all sales of security financial instruments, unless an exemption is available. If an exemption is not available, the company must comply with the initial public offering requirements prescribed by the SEC. The latter law created the Securities and Exchange Commission (SEC) and governs the secondary trading of securities.

Since the passage of those laws, the SEC has not received much in the way of guidance from Congress, even with the introduction of cryptocurrencies. A press release dated December 20 states why the bill is necessary:

“This bill clarifies a 1946 court case that the SEC has been using to determine what a security is and effectively makes it clear that the finished product (or oranges as it relates to the Howey Test) is no longer a security.”

The Howey Test stems from a 1946 case that held that the offer of a land sales and service contract was an “investment contract” within the meaning of the Securities Act of 1933. In reaching this conclusion, the court formed a four-prong test, known as the Howey Test, which has been followed by the SEC and courts for over 70 years. 

With the rise in cryptocurrency popularity, it has been disputed whether digital assets are securities under the Howey Test. However, SEC Chairman Jay Clayton does not agree, stating at a Senate hearing that every ICO he has “seen is a security.”

The Token Taxonomy Act, as proposed, would define digital tokens and exempt them from the definition of a security provided they are on a functional blockchain network. It also proposes other changes that could lead to an uptick in cryptocurrency adoption, for example:

“To adjust taxation of virtual currencies held in individual retirement accounts, to create a tax exemption for exchanges of one virtual currency for another, to create a de minimis exemption from taxation for gains realized from the sale or exchange of virtual currency for other than cash, and for other purposes.”

The two congressmen argue that their “fix” will provide a lighter regulatory framework the industry needs. There’s also the desire to keep pace, as the release adds:

“This bill provides the certainty American markets need to compete with Singapore, Switzerland, and others who are aggressively growing their blockchain economies. To be certain, there will be other regulatory initiatives at some point, but this legislation is an essential first step to keeping this market alive in the United States.”

In other words, they find this uncertainty is motivating companies to leave the US for regions with more regulatory clarity, implying this is threatening US jobs and innovation.

Passing the proposed act in Congress would force Clayton’s hand, giving the SEC new legislation to follow. That is, if it were passed. (And it won’t be this year – today is likely the last day the House is in session, so the bill must be reintroduced next year.) France is also keen to be a leading blockchain region, but the French National Assembly this week rejected four tax amendments for cryptocurrencies, leading some to doubt the French government’s commitment to the technology.

Melanie Kramer is a freelance FinTech, blockchain, and cryptocurrency writer based between France and Canada. Melanie has studied, and retains an avid interest in, global politics, business, and economics.

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